When to Hire a Collection Agency

Generally speaking, the ideal time to hire a collection agency is when you feel that your customer has no intention of paying you. The general rule of thumb when it comes to collecting on an unpaid bill is that sooner is much better than later. Statistically speaking, after 3 months you can expect to collect $0.73 on every dollar. However, after 6 months the amount you're likely to collect drops to only 50% and then to only 25% after 1 year.

If you're serious about getting your payment, you'll want to hire a collection agency once the account is 90 days overdue. Of course, you can use discretion to decide which accounts will be sent to a collection agency and which will not. If a long-time customer is experiencing some financial trouble and has been in contact with you, you may wait longer than for a new customer who has been avoiding your bills and phone calls.

Warning signs that customers are not planning on paying:

Aside from missing payments, there are a few specific signals that customer send to cue you in to the fact that they probably don't intend to pay.

- Relocating without submitting a change of address with you or the postal service- Customer doesn't respond to your phone calls, bills or final notice letters- Customer denies that he or she owes you money- Customer disputes the quality of the product or service and refuses to pay

If your debtors show any of these signs, there is no need to wait past 30 days to hire a collection agency.

When not to hire a collection agency:If the debtor is a company that has gone out of business, find out what type of company it was before hiring a collection agency. If the company was a corporation or an LLC, your chances of collecting the debt are low unless you have a personal guarantee. However, if the company was a sole proprietorship, a collection agency can collect the debt from the owners who are personally liable for any debt.

What to do if your debtors won't pay:The reason it's so critical to move quickly when it comes to debt collection is that it is very difficult to recoup a loss from a non-paying customer. You can write off the cost of any goods sold that weren't paid for as a bad debt tax deductible item. However, you cannot write off the profit you should have earned from the sale of the goods and you cannot write off money owed for services rendered.

Since the amount of time that elapses has a direct impact on the amount you'll recover, your choice of when to hire a collection agency depends on the amount of profit your business needs to thrive. Whether $500 or $50,000, having a solid plan of action to take once an account becomes delinquent will save your company's hard earned money.